HAY 2 2 2O09 - SCOTUSblog · 6/8/2009  · HAY 2 2 2O09 IN THE SUPREME COURT OF THE UNITED STATES GEOFFREY, INC., Petitioner, v. COMMISSIONER OF REVENUE, Respondent. ON PETITION FOR

No. 08-1207HAY 2 2 2O09

IN THESUPREME COURT OF THE UNITED STATES

GEOFFREY, INC.,

Petitioner,v.

COMMISSIONER OF REVENUE,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARITO THE SUPREME JUDICIAL COURT OF

MASSACHUSETTS

BRIEF IN OPPOSITION

MARTHA COAKLEYAttorney General

THOMAS A. BARNICO*Assistant Attorney General

One Ashburton PlaceBoston, MA 02108-1598(617) 963-2086

* Counsel o£Reeord

QUESTION PRESENTED

A corporation licenses intangible propertysuch as trademarks to an affiliated corporation foruse by the affiliate within Massachusetts. Thelicensing corporation receives income from thelicensee and concedes that it is "doing business" inMassachusetts and is therefore subject under statelaw to the corporate net income tax, a tax concededby the taxpayer to be fairly apportioned, non-discriminatory, and fairly related to the servicesprovided by the State. The. question presented iswhether the activit~: of "the t~kpaye~.~"~has a"substantial nexus" with Massachusetts, as requiredby the Commerce Clause for the assessment of sucha tax on a corporation engaged in interstatecommerce, despite the fact that the taxpayer has notangible property in the taxing State.

TABLE OF CONTENTS

QUESTION PRESENTED .........................................i

TABLE OF AUTHORITIES .......................................v

INTRODUCTION ......................................................1

STATEMENT .............................................................2

REASONS FOR DENYING THE PETITION ........11

THE DECISION OF THE SJC ISCONSISTENT WITH QUILL ANDTHE REQUIREMENT IN COMPLETEAUTO THAT A STATE TAX BEAPPLIED TO "AN ACTIVITY WITH ASUBSTANTIAL NEXUS WITH THETAXING STATE." ..........................................11

no The Decision of the SJC IsConsistent with Quill’sExpress Limitation to Salesand Use Taxes ..........................

The Fact- Specific RulingBelow Is Consistent withComplete Auto Because thePetitioner’s Activities Have aSubstantial Nexus withMassachusetts ...........................................13

II. RATHER THAN CREATING ACONFLICT AMONG STATE COURTS,THE DECISION OF THE SJC

o°°111

ENLARGES A GROWINGCONSENSUS OF THE STATES’HIGHEST COURTS REJECTING THECLAIM THAT THE COMMERCECLAUSE REQUIRES A "PHYSICALPRESENCE" IN ORDER TOESTABLISH A "SUBSTANTIALNEXUS." ........................................................15

III. THE COURT SHOULD NOT GRANTREVIEW BASED ON MERESPECULATION ABOUT BURDENSON INTERSTATE AND FOREIGNCOMMERCE .................................................21

A. Speculative Claims About an"Undue Burden" on InterstateCommerce Do Not SupportPlenary Review of the IssuePresented ..................................................21

B. The Alleged Impact onForeign Commerce Was NotRaised Below and In AnyEvent Does Not SupportReview by this Court .............................25

IV. THE COURT SHOULD DENY THEPETITION IN DEFERENCE TO THECONSTITUTIONAL ROLE OFCONGRESS IN WEIGHINGBURDENS ON INTERSTATECOMMERCE ..................................................26

CONCLUSION .........................................................28iv

TABLE OF AUTHORITIES

Cases

A&F Trademark, Inc. v. Tolson, 605 S.E.2d187 (N.C. Ct. App. 2004), cert. denied,546 U.S. 821 (2005) ........................................16

America Online, Inc. v. Johnson, No. M2001-00927-COA-R3-CV, 2002 WL 1751434(Tenn. Ct. App. July 30, 2002) .......................18

Borden Chems. & Plastics v. Zehnder,726 N.E.2d 73 (Ill. App. Ct. 2000) .................17

Bridges v. Geoffrey, Inc.,984 So.2d 115 (La. Ct. App. 2008) ................16

Buehner Block Co. v. Wyoming Dep’t of Rev.,139 P.3d 1150 (Wyo. 2006) .............................17

Capital One Bank v. Commissioner of Rev.,899 N.E. 2d 76 (Mass. 2009), petition forcert. filed, U.S. No. 08-1169 .....................17, 22

Complete Auto Transit, Inc. v. Brady,430 U.S. 274 (1977) ................................passim

Comptroller of the Treasury v. SYL, Inc.,825 A.2d 399 (Md. 2003) ................................16

Couchot v. State Lottery Comm’n,659 N.E.2d 1225 (Ohio 1996) .........................16

V

General Motors Corp. v. City of Seattle,25 P.3d 1022(Wash. Ct..App. 2001) ....................................16

Geoffrey, Inc. v. South Carolina Tax Comm’n,437 S.E.2d 13 (S.C.),cert. denied, 510 U.S. 992 (1993) ...................16

Geoffrey, Inc. v. O~la. Tax Comm’n,132 P.3d 63.2(Okla. Civ. App. Ct. 2006) ..............................16

Guardian Industries Corp. v. DepartmentOf Treasury,499 N.W.2d 349 (Mich. App. 1993) ..........19, 20

In Re Woods,143 U.S. 202 (1892) ........................................23

J.C. Penney Nat’l Bank v. Johnson,19 S.W.3d 831 (Tenn. Ct. App. 1999),cert. denied, 531 U.S. 927 (2000) ...................18

Kmart Props., Inc. v. Taxation andRevenue Dep’t,131 P.3d 27 (N.M. Ct. App. 2001),cert. granted, 40 P.3d 1008 (N.M.2002),cert. quashed, 131 P.3d 22 (N.M. 2005) .........16

Lanco, Inc. v. Dir.:. Div. of Taxation,908 A.2d 176 (N.J. 2006),cert. denied~ 127 S.Ct. 2974 (2007) ................16

vi

MBNA Am. Bank, N.A. v. Ind. Dep’t ofState Revenue,895 N.E.2d 140 (Ind. Tax Ct. 2008) ...............17

McGoldrick v. Compagnie Generale,309 U.S. 430 (1940) ........................................25

National Bellas Hess, Inc. v. Department ofRevenue of Ill.,386 U.S. 753 (1967) ................................passim

Quill v. North Dakota,504 U.S. 298 (1992) ................................passim

Portland 76 Auto~Truck Plaza, Inc.v. Union Oil Co.,

153 F.3d 938 (9th Cir. 1998) ........................... 21

Rice v. Sioux City Cemetery,349 U.S. 70 (1955) ..........................................15

Rylander v. Bandag Licensing Corp.,18 S.W.3d 296 (Tex. App. 2000) .....................20

Secretary, Dep’t of Revenue v. Gap(Apparel), Inc.,886 So.2d 459 (La. Ct. App. 2004) .................16

Spector Motor Service v. O’Connor,340 U.S. 602 (1951) ........................................11

Tax Comm’r of W. Va. v. MBNA Am. Bank,N.A., 640 S.E.2d 226 (W. Va. 2006),cert. denied sub nom. FIA Card

vii

Services, N.A. v. Tax Comm’rof W. Va., 127 S.Ct. 2997 (2007) ....................17

Wisconsin v. J.C. Penney Co.,311 U.S. 435 (1940) ........................................28

Constitutional and Statutory Provisions

U.S. Const. art. 1, § 8 ...................................pa~im

15 U.S.C. § 381 ....................................................19, 26

15 U.S.C. § 391 .........................................................26

28 U.S.C. § 1254(].) ....................................................1

49 U.S.C. § 11501 .....................................................26

Mass. Gen. Laws oh. 14, §§ 1-3 .................................2

Mass. Gen. Laws ch. 63, § 30 ................................2, 6

Mass. Gen. Laws oh. 63, § 38 ....................................6

Mass. Gen. Laws oh. 63, § 39 ....................................2

o.oVIII

Other Authorities

Interstate Taxation Act: Hearings on H.R.11798 and Companion Bills BeforeSpecial Subcomm. On State Taxation ofInterstate Commerce of the HouseComm. on the Judiciary, 89th Cong., 2dSess. (1966) .....................................................27

Business Activity Tax Simplification Act of2007, H.R. 1083, 111th Cong. (2009) ..............26

R.L. Stern, et al., Supreme Court Practice(9th ed.) .............................................................18

ix

INTRODUCTION

Pursuant to Supreme Court Rule 15,respondent Commissioner of Revenue ofMassachusetts submits this brief in opposition to thepetition for a writ of certiorari. The writ should bedenied because (1) the decision of the MassachusettsSupreme Judicial Court ("SJC") is consistent withthe decisions of this Court and the requirement thata state tax be applied to "an activity with asubstantial nexus with the taxing State"; (2) thedecision of the SJC enlarges a growing consensus ofthe States’ highest courts rejecting the claim thatthe Commerce Clause requires a "physical presence"in order to establish a "substantial nexus"; (3) theCourt should not grant review based on merespeculation about burdens on interstate and foreigncommerce; and (4) the Court should deny review indeference to the constitutional role of Congress inweighing burdens on interstate commerce.

OPINIONS BELOW, JURISDICTION,AND CONSTITUTIONAL AND STATUTORY

PROVISIONS INVOLVED

Respondent accepts petitioner’s citations tothe opinions below and the constitutional andstatutory provisions involved. Regarding thejurisdiction of the Court, respondent notes that thesole provision invoked by the petitioner, 28 U.S.C. §1254(1), does not authorize review by this Court of ajudgment of a state court.

STATEMENT

The Mass. Corporate Excise Tax

The respondent is the state officialauthorized to enforce the tax laws of Massachusetts.Mass. Gen. Laws ch. 14, §§ 1-3; ch. 62C, § 3. Amongher duties is the enforcement of the corporate excisetax imposed on domestic and out-of-statecorporations doing business in the Commonwealth.See Mass. Gen. Laws ch. 63, § 39 (foreigncorporations). During the relevant years, Mass. Gen.Laws ch. 63, § 30, defined "foreign corporations" as:

a corporation, association or organizationestablished., organized or chartered underlaws other than those of the commonwealth,for purposes for which domestic corporationsmay be organized . . . which has privileges,powers, rights or immunities not possessed byindividuals or partnerships ....

Mass. Gen. Laws ch. 63, § 30(2) (1996 ed.). Chapter63, § 39 provided in part:

Except as otherwise provided herein, everyforeign corporation, exercising its charter, orqualified to do business or actually doingbusiness in the commonwealth, or owning orusing any part or all of it~ capital, plant orany other property in the commonwealth,~hallpay, on account of each taxable year, the

excise provided in subsection (a) or (b) of thissection, whichever is greater.

The excise levied herein is due and payable onany one or all of the following alternativeincidents:

(1) The qualification to carry on or dobusiness in this state or the actual doing ofbusiness within the commonwealth in acorporate form. The term "doing business" asused herein shall mean and include each andevery act, power, right, privilege, or immunityexercised or enjoyed in the commonwealth, asan incident to or by virtue of the powers andprivileges acquired by the nature of suchorganizations, as well as, the buying, sellingor procuring of services or property.

(2) The exercising of a corporation’s charteror the continuance of its charter within thecommonwealth.

(3) The owning or using any part or all ofits capital, plant or other property in thecommonwealth in a corporate capacity.

It is the purpose of this section to require thepayment of this excise to the commonwealthby foreign corporations for the enjoymentunder the protection of the laws of theCommonwealth, of the powers, rights,privileges and immunities derived by reason

3

of the corporate form of existence andoperation.

Mass. Gen. Laws ch. 63, § 39 (1996 ed.)(emphasisadded).

The Commissioner has the power under Mass.Gen. Laws ch. 14, § 6(1) to "make... and from timeto time.., revise.., such reasonable regulations...as may be necessary to interpret any statuteimposing any tax, excise or fee." One year after thedecision of this Court in Quill v. North Dakota, 504U.S. 298 (1992), the Commissioner promulgated 830Code of Mass. Regs. (C.M.R.) § 63.39.1 to "describe[]the circumstances under which a foreign corporationis subject to the tax jurisdiction of Massachusettsunder [Mass. Gen. Laws ch.] 63, § 39." 830 C.M.R. §63.39.1(1)(a). App. 92a. Title 830 C.M.R. § 63.39.1(4)and (4)(d)(1) provide that "a foreign corporation mustfile a return in Massachusetts and pay theassociated tax if... the corporation owns propertythat is held by another in Massachusetts under alease, consignment, or other arrangement." App.96a-97a; gee 3 MassTaxGuide--Corporate Excise(Thomson West, 2007) at R-244 (setting forth historyof relevant regula~;ory authority).

Specifically addressing intangible property,the Commissioner in 1996 issued Directive 96-2. Id.at PWS-214-16, App. 125a-130a. Directive 96-2states the Commissioner’s position regarding theapplication of the corporate excise to the ownership

4

and use of intangible propertyCommonwealth. The Directive states:

in the

A foreign corporation’s intangible propertyused within Massachusetts will subject thatcorporation to the corporate excise when:

The intangible property generates, or isotherwise a source of, gross receiptswithin the state for the corporation,including through a license orfranchise;

The activity through which thecorporation obtains such gross receiptsfrom its intangible property ispurposeful (e.g., a contract with an in-state company); and

The corporation’s presence within thestate, as indicated by its intangibleproperty and its activities with respectto that property, is more than deminimis.

App. 125a-126a. Directive 96-2 further states that"the definition of intangible property generallyincludes, but is not limited to, copyrights, patents,trademarks, trade names, trade secrets, servicemarks, and know-how." App. 126a.

A finding of constitutional "nexus" betweenthe activities of an out-of-state corporation andMassachusetts does not subject all of the

5

corporation’s net income to tax by theCommonwealth. A foreign corporation doingbusiness within and without Massachusetts andsubject to tax under § 39 may apportion its incomeamong the States and thereby reduce its net incomesubject to tax in each State under the formula setforth in Mass. Gen. Laws ch. 63, § 38. Taxable netincome is deternfined by taking the corporation’sFederal net income, as defined in Mass. Gen. Lawsch. 63, § 30, applying statutory deductionsenumerated in Mass. Gen. Laws ch. 63, § 38(a), andmultiplying the result by the three-factorapportionment formula in G.L.c. 63, § 38(c). Theapportionment formula is the "weighted average ofthree factors---property, payroll, and sales---commonly used to compare the value of businessconducted within and without [Massachusetts]."Gillette Co. v. Commissioner of Revenue, 683 N.E.2d270, 273 (Mass. 1997). "Each factor is a fraction initself, the numerator of which is the local corporateproperty, payroll, or sales; the denominator of whichis the corporation’s total property, payroll, or sales’everywhere’ during the taxable year." Id.

Proceedings before the Commissionerof Revenue, the Appellate Tax Board,and the Supreme Judicial Court

Geoffrey failed to file tax returns under Mass.Gen. Laws c. 63, § 39 for the taxable years endingJanuary 31, 1997 through January 31, 2001 forroyalty income earned from its affiliate inMassachusetts for the use of Geoffrey’s intangibleproperty there. App. 7a, 24a. The Commissioner

assessed Geoffrey for taxes for the years at issue inthe amount of approximately $ 3.1 million. App. 7a.Geoffrey sought an abatement of the tax. App. 7a,25a. The Commissioner denied the application forabatement. App. 7a-8a.

Geoffrey appealed to the MassachusettsAppellate Tax Board (the "Board"). App. 8a, 25a.The Board affirmed the Commissioner. App. 8a,40a-46a. The Board rejected the claim that theCommerce Clause requires the physical presence ofthe taxpayer in order to assess a net income orfranchise tax. App. 40a. Relying on its decision inCapital One Bank v. Comm’r of Revenue, ATB Nos.C262391, C262598, 2007 WL 1810723 (Mass. App.Tax Board June 22, 2007), aft"d, 453 Mass. 1 (2008),petition for cert. filed, United States Supreme CourtNo. 08-1169, and several similar decisions involvingGeoffrey and issued by other state courts, the Boardruled that there is no such requirement for such astate corporate excise tax under the CommerceClause. App. 8a, 40a-46a. Turning to Geoffrey’spresence in Massachusetts, the Board found thatGeoffrey had "derived substantial economic gain"from the use of its property in the Commonwealth.App. 43a-44a. The Board found that the "good willrepresented by Geoffrey’s Trademarks, which wascarefully guarded, and the assurance of productquality they were intended to give, enabledtransactions to occur in Massachusetts from whichGeoffrey obtained substantial royalty income." App.44a. The Board accordingly found that the"substantial nexus" required by the Commerce

7

Clause "was satisfied by" Geoffrey’s "economicpresence in Massachusetts." Id.

Geoffrey appealed the decision of the Board tothe Massachusetts Appeals Court. App. 19a. TheSupreme Judicia:[ Court granted direct appellatereview and affirmed. App. la, 2a, 19a. The SJCheld that "substantial nexus can be establishedwhere a taxpayer domiciled in one State carries onbusiness in another State through the licensing of itsintangible property that generates income for thetaxpayer." App. l la. Relying on facts set forth inthe next section of this brief, the SJC furtherconcluded that "Geoffrey’s activities established asubstantial nexus with Massachusetts." App. 13a.

Facts Concerning Geoffrey’sActivities in Massachusetts

Pursuant to Supreme Court Rule 15, therespondent supplements petitioner’s statement ofthe case with the following facts drawn from thedecisions of the B¢,ard and the SJC.

Geoffrey was formed in 1984, as a wholly-owned subsidiary of Toys "R" Us, Inc. ("Toys Inc.").App. 3a-4a, 26a. Toys Inc. later transferredtrademarks, trade names, and service marks toGeoffrey in exchange for stock. App. 4a, 26a. Amongthe transferred intellectual property were the "Toys’R’ Us" and "Kids ’R’ Us" trademarks and the"Geoffrey" giraffe character logo. Id. A 1991appraisal by Arthur Andersen & Co. placed the fair

8

market value of Geoffrey’s intellectual property at$1.5 billion. App. 4a, 26a-27a.

During the years at issue, Geoffrey’s entirebusiness consisted of licensing its intellectualproperty to various Toys Inc. operating companies touse in furtherance of their retail operations. App.4a, 27a. One such company was Toys "R" Us-Mass,Inc. ("TRUMI"), another wholly owned subsidiary ofToys Inc. App. 4a, 26a. During the years at issue,TRUMI operated twenty-six Toys "R" Us retail toystores and Kids "R" Us retail children’s clothingstores in Massachusetts. Id.. Pursuant to a licenseagreement dated May 3, 1992, Geoffrey licensed itsintellectual property to TRUMI for use exclusively inMassachusetts in exchange for royalty payments toGeoffrey at a rate of three percent of TRUMI’s netsales income at its Toys "R" Us stores, and twopercent of its net sales income at its Kids "R" Usstores. App. 4a, 27a.

In February 1997, Geoffrey entered into asimilar licensing agreement with Babies "R" Us, Inc.for the use of Geoffrey’s "Babies ’R’ Us" trademark.App. 5a, 28a. Babies "R" Us is a division of BabySuperstore, Inc., which is an affiliate of TRUMI. Id.During the years at issue, Babies "R" Us, Inc.operated three retail stores in Massachusetts. Id.Under the licensing agreement, Babies "R" Us, Inc.paid Geoffrey a royalty rate of one percent of netsales income for the fiscal year 1996, one and onehalf percent of net sales income for the fiscal year1997, and two percent of net sales income for theduration of the agreement. Id.

Geoffrey derived over $33 million in royaltiesfrom the Massachusetts consumer marketplaceduring the years at issue. App 6a. Geoffrey’strademarks appeared on signage, store displays, andproduct packaging at Massachusetts Toys "R" Us,Kids "R" Us, and Babies "R" Us retail stores. Id.

Geoffrey also depended on quality control toprotect its intellectual property and to maximize itsroyalty income. App. 5a-6a, 29a. Pursuant to thelicense agreements with TRUMI and Babies "R" Us,Geoffrey retained the right to preview anddisapprove product samples and specifications,signs, labels, tag,% packaging material, advertisingand sales promotion materials, bills, catalogs, andpamphlets which displayed any of its intellectualproperty. App. 5a-6a, 29a. Geoffrey’s royalty incomeof $33 million was dependent on both the appearanceand the display of the intellectual property as well asthe proper operations and cleanliness of the retailstores. App. 5a-6a, 29a-30a.

Finally, Geoffrey had access to bothMassachusetts col~rts and federal courts located inMassachusetts, to protect its intellectual propertyand its right to royalty payments under the licensingagreements. App. 8a, 32a.

10

REASONS FOR DENYING THE WRIT

THE DECISION OF THE SJC ISCONSISTENT WITH QUILL AND THEREQUIREMENT IN C01gPLETE AUTO

THAT A STATE TAX BE APPLIED TO "ANACTIVITY WITH A SUBSTANTIAL NEXUSWITH THE TAXING STATE."

A. The Decision of the SJC Is Consistent withQuills Express Limitation to Sales andUse Taxes.

Under the Commerce Clause, a State may taxa company engaged in purely interstate commerceprovided that the tax is "[1] applied to an activitywith a substantial nexus with the taxing State, [2] isfairly apportioned, [3] does not discriminate againstinterstate commerce, and [4] is fairly related to theservices provided by the State." Comp]ete AutoTrsnsit, Inc. y. Brady, 430 U.S. 274, 279 (1977). Inpermitting the States to tax purely interstatecommerce, Comp]ete Auto overruled Spector MotorService v. O’Connor, 340 U.S. 602 (1951)(strikingdown a Missouri tax on an interstate truckingcompany). Id. Complete Auto thus reaffirmed theprinciple that "interstate commerce may be made topay its own way." Id. at 288-89 n.15.

Here, petitioner concedes that the tax is fairlyapportioned, does not discriminate against interstatecommerce, and is fairly related to the servicesprovided by the State. It challenges the tax onlyunder the "substantial nexus" test.

11

The Court applied the substantial nexus testto the collection c,f a use tax in Quill. A use tax istypically imposed on the storage, use, orconsumption of goods or services purchased outsidethe taxing State for storage, use, or consumptionwithin the taxing State. See Mass. Gen. Laws ch.64I, § 2. The company in Quill was an out’of-statemail order house that had no affiliates orrepresentatives, and only de minimis tangible orintangible properly in the taxing State. The onlyconnection between the company and its customersin the taxing State was "by common carrier or theUnited States mail." Quill, 504 U.S. at 301(quotation omitted). The Supreme Court of NorthDakota had declined to follow National Hellas Hess,Inc. v. Departme~t of Revenue of Illinois, 386 U.S.753, 758 (1967)---another mail-order sales and usetax case~on the ground that the holding was"obsolete." Id. Although this Court in Quill agreed"with much of the state court’s reasoning" and heldthat the tax satisfied due process, it reversed thestate-court judgment, reaffirmed National HellasHess, and held that the lack of a physical presenceby the taxpayer demonstrated a lack of "substantialnexus" under the Commerce Clause. Id.

The rule maintained in Quill, however, is notcontrolling here. In preserving the National HellasHess rule for sales and use taxes, this Court reliedheavily on the principle of stare deeisis. Id. at 311,317-18. The Court observed that "contemporaryCommerce Clause, jurisprudence might not dictatethe same result were the issue to arise for the first

12

time today." Id. at 311, 318. The Court also reliedon factors specific to sales and use taxation and themail-order industry: the Court stated that the rulein National Bellas Hess had "engendered substantialreliance and has become part of the basic frameworkof a sizable industry." Id._ at 317. Relying on thesefactors, Quill reaffirmed that substantial nexus for asales or use tax collection duty requires the physicalpresence of the taxpayer in the taxing State, id. at316-17, but carefully noted that it "has not, in [its]review of other types of taxes, articulated the samephysical-presence requirement .... " Id. at 314; seeid. at 317 ("concerning other types of taxes we havenot adopted a similar bright-line, physical presencerequirement"). Justice Sealia’s concurring opinion,which was joined by Justices Kennedy and Thomas,relied even more heavily on stare decisis, ld. at 320.Given the Court’s express limitation of its holding,and the Court’s substantial reliance on the principleof stare decisis, there is no basis for the claim thatthe decision below is in conflict with Quill.

B. The Fact-Specific Ruling Below IsConsistent with Complete Auto Becausethe Petitioners’ Activities Have aSubstantial Nexus with Massachusetts.

The SJC correctly adhered to the Court’sexpress limitation of Quill to sales and use taxes andapplied the Complete Auto test without imposing athreshold requirement that petitioner have aphysical presence in Massachusetts. App. lla.Complete Auto’s substantive focus on "activities"

13

readily supports that judgment, given thepetitioner’s commercial contacts with Massachusettsand the use of its intangible property there, asdetailed by the SJC. App. 13a.

The decisio:a below thus represents a straight-forward application of Complete Auto’s substantivefocus on "activities." In the absence of a governingprecedent like Bellas Hess, there is no warrant totransform the Co~p]ete Auto nexus test to demandphysical presence as the sine qua non of corporateincome taxation. Under petitioner’s theory, abusiness owning and leasing to another a storefrontin Massachusetts, and generating $100,000 ofrevenue from the lease, would have physicalpresence in Massachusetts and thus be subject totaxation. Yet a firm such as the petitioner, receivingmillions of dollars of revenue from royalty paymentsfrom firms licensed to use its intangible property inMassachusetts, would be immune from a fairlyapportioned, non-discriminatory corporate excisetax. This result is not compelled by stare decisis, asin Quill (in light of Bellas Hess). Indeed, it conflictswith the focus oH. substance required by CompleteAuto, which generally requires that interstatecommerce "pay its own way." Id. at 288-89 n.15.The decision of l~he SJC is fully consistent withComplete Auto and does not warrant review by thisCourt.

14

II. RATHER THAN CREATING ACONFLICT AMONG STATE COURTS,THE DECISION OF THE SJCENU_ARGES A GROWING CONSENSUSOF THE STATES’ HIGHEST COURTSREJECTING THE CLAIM THAT THECOMMERCE CLAUSE REQUIRES A"PHYSICAL PRESENCE" IN ORDER TOESTABLISH A "SUBSTANTIAL NEXUS."

In determining whether to grant certiorari,the Court generally requires that a conflict ofdecisions be "real and embarrassing." Rice v. SiouxCity Cemetery, 349 U.S. 70, 79 (1955) (quotationomitted). In this case, there is no conflict ofsufficient degree or type. The overwhelmingmajority of state courts that have addressed theissue since the decision in QuiI] in 1992 have heldthat a physical presence is not required for a State toimpose a fairly apportioned, non-discriminatory netincome tax on corporations doing business in thetaxing State. No state supreme court has heldotherwise. Petitioner claims that there "is a mature,well-recognized, and entrenched split of authorityamong the state courts on the question" presented.Pet. 16. However, the three intermediate appellatecourt decisions cited by the petitioner are all at leastnine years old and do not establish a current andsignificant conflict of state authority. In fact, anyconflict of state decisions, if it had ever reachedmaturity, is now well past its shelf life.

A year after the decision in Qui]], the SouthCarolina Supreme Court upheld an income-based tax

15

under the Commerce Clause, ruling that substantialnexus was created by the use of the taxpayer’strademarks within the taxing State. See Geo£frey,Inc. v. South Carolina Tax Comm’n, 437 S.E.2d 13,18 (S.C.), cert. denied, 510 U.S. 992 (1993). Thecourt held that "by licensing intangibles for use inthis State and deriving income from their use here,Geoffrey has a ’substantial nexus’ with SouthCarolina." Id. In the seventeen years after Quill, theclear majority of tlhe state courts that haveaddressed the issue have similarly declined to applya physical presence requirement to an income-basedtax, in many cases brought by the petitioner hereand involving the licensing of intangible property.See Geoffrey, Inc. v. Okla. Tax Comm’n, 132 P.3d632, 638 (Okla. Cir. App. Ct. 2006)(trademarklicensing); Lance, Inc. v. Dir., Div. o£ Taxation, 908A.2d 176, 177 (N.iI. 2006), cert. denied, 127 S.Ct.2974 (2007)(same); A&F Trademark, Inc. v. Tolson,605 S.E.2d 187, 195 (N.C. Ct. App. 2004), cert.denied, 546 U.S. 821 (2005)(same); KmartProps.,Inc. v. Taxation andRevenue Dep’t, 131 P.3d 27(N.M. Ct. App. 2001), cert. granted, 40 P.3d 1008(N.M. 2002), cert. quashed, 131 P.3d 22 (N.M. 2005)(same); Bridges v. Geoffrey, Inc., 984 So.2d 115 (La.Ct. App. 2008) (same); Secretary, Dep’t of Revenuev. Gap (Apparel), ~(ne., 886 So.2d 459, 462 (La. Ct.App. 2004) (same); Comptroller o£ the Treasury v.SYL, Inc., 825 A.2d 399 (Md. 2003)(same); see alsoGeneral Motors Ggrp. v. City o£Seattle, 25 P.3d1022, 1029 (Wash. Ct. App. 2001); Couehot v. StateLottery Comm’n, 659 N.E.2d 1225, 1230 (Ohio1996)("no indication in Quill that the Supreme Courtwill extend the physical presence requirement to

16

cases involving taxation measured by income derivedfrom the state"); Borden C_bems. & Plastics v.~Tehnder, 726 N.E.2d 73, 80 (Ill. App. Ct.2000)("Plaintiff argues that in Quill, the SupremeCourt ’left open’ the question of whether a physicalpresence is required in order to satisfy thesubstantial nexus requirement in other tax cases.We disagree."); Buehner Block Co. v. Wyoming Dep’tof Revenue, 139 P.3d 1150, 1158 n.6 (Wyo. 2006)(Bellas Hess and Quill"created [a] specializedjurisprudence" applicable to "sales and use taxcase[s]").

In similar cases involving out-of-state creditcard companies, the two state supreme courtdecisions on point agree. Capital One Bank v.Commissioner of Revenue, 899 N.E.2d 76 (Mass.2009), petition for cert. filed, (U.S. March 18, 2009)(No. 08-1169); Tax Comm’r of W. Va. v. MBNA Am.Bank, N.A., 640 S.E.2d 226 (W. Va. 2006), cert.denied sub nora. FIA Card Services, N.A. v. TaxComm’r of W. Va., 127 S.Ct. 2997 (2007). MBNAAm. Bank held that (1) Quill was "groundedprimarily on stare deeisis, (2) the Court "appears tohave expressly limited QuilIs scope to sales and usetaxes," and (3) "franchise and income taxes . . . donot appear to cause the same degree of complianceburdens." Id. at 232-33; see also MBNA Am. Bank,N.A. v. Ind. Dep’t of State Revenue, 895 N.E.2d 140(Ind. Tax Ct. 2008) (citing West Virginia MBNA Am.Bank decision and rejecting requirement of physicalpresence).

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Petitioner claims that the "decision belowconflicts directly with the state appellate courtrulings in Tennessee, Michigan, and Texas," but tellsonly part of the story. Pet. 16. These older decisionsby state intermediate appellate courts1 do notestablish a conflict of authority that is worthy ofreview.

Only one of the three decisions cited by thepetitioner strikes a State’s franchise or income taxbecause of a lack of physical presence by thetaxpayer in the taxing State. See J.C. Penne~v Nat’]Bank v. Johnson, 19 S.W.3d 831, 840-41 (Tenn. Ct.App. 1999), cert:, denied, 531 U.S. 927 (2000).However, a later decision by the same intermediateappellate court cautions against too broad a readingof the decision in J.C. Penney. America Online, Inc.v. Johnson, No. M2001-00927-COA-R3-CV, 2002 WL1751434 at *2 (Tenn. Ct. App. July 30, 2002),declined to read or. C. Penney to "substitute ’physicalpresence’ for ’nexus’ as the first prong of theComplete Auto Transit test" in a challenge to a taxon an internet service provider. Petitioners claimthat in America 5~nline "Tennessee has not retreatedfrom the holding in J.C. Penney," Pet. 22-23, but theimplication of America Online is clear: J.C. Penney

United States Supreme Court Rule 10(b) generallylimits the Court’s con:dderation of a conflict of state decisions tothose by "the highest court of a state." Id. Thus, the Court"tries to achieve uniformity in federal matters only among thevarious courts whose ,decisions are otherwise final in theabsence of Supreme Court review." R.L. Stern, eta]., SupremeCourt Practice (9th ed. 256).

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stands alone among the States and the decision haslimited force even on its home field. CY. Wi~niewskiv. United State~, 353 U.S. 901, 902 (1957) ("It isprimarily the task of [a lower court] to reconcile itsinternal difficulties.").

Nor does the 1993 decision of the MichiganCourt of Appeals in Guardian Industrie~ Corp. v.Department o£ Treasury, 499 N.W.2d 349 (Mich.App. 1993), demonstrate a significant split of stateauthority. Guardian did not strike down any tax,much less resolve the issue presented here. Rather,it involved the question whether certain taxpayerswith undeniable physical presence in Michigan couldexclude from Michigan’s "single business tax" certainof its "sales" of tangible personal property outsideMichigan on the ground that they were taxable inother States. Id. at 352, 353. In the unusual posturein which the ease arose, it was the taxpayers thaturged that their nexus in other States was sufficientfor taxation by those States; Michigan argued thatnexus was insufficient in those States, and thetaxing authorities in the other States were notinvolved in the ease. One taxpayer stipulated thatits activities in the non-Michigan States were limitedto mere solicitation, and so was found not to betaxable there by the non-Michigan States. Guardianthus turned on whether the level of these activitiesforfeited the statutory immunity conferred by P.L.86-272, 15 U.S.C. § 381, not whether they reachedthe threshold level of constitutional nexus.Guardian thus does not hold that a state income orfranchise tax requires a physical presence; at most,it holds that in some circumstances a tax on a

19

company whose in-state activities do not exceed thesolicitation of sales of tangible goods may beforeclosed by a federal law limiting state taxation,such as P.L. 86-2’?2. But that issue is not the sameas that presented here. Finally, Guardian has littleremaining force even in Michigan: the Michiganlegislature has eliminated the tax at issue inGuardian and enacted a new tax that does notrequire a physical presence. MCL 208.1200(1).

Nor does the 2000 decision of the Texas Courtof Appeals in Ry]ander v. Bandag Licensing Corp.,18 S.W.3d 296 (Tex. App. 2000), establish a currentand significant conflict. In striking down theapplication of a state franchise tax, the Texasintermediate appellate court repeatedly stressedthat the State had applied its franchise tax "solely"on the basis of the taxpayer’s passive possession of a"certificate of authority" to do business in Texas. Id._at 298, 299, 300.2 Despite broader dicta, therefore,id. at 300, Ry]ander does not strike an income orfranchise tax where the State relies on activelicensing of a taxpayer’s valuable intangible property

2 Texas relied on the certificate of authority because it

was state "policfl’ that "the licensing of intangibles, includingpatents, in Texas did not create franchise tax nexus." Id_. at302 (emphasis in original). Thus, Texas did not rely on thepatent royalty payme~ats that Bandag received from its Texasaffiliate. The court indicated that the taxpayer’s "sole activity"of relevance connectir g it to Texas was "communication byUnited States mail and common carriers," without identifyingany economic activity (except perhaps its licensing activities,which Texas did not c.gunt) that was the subject of suchcommunication. Id. at 300.

2O

for use within the taxing States, where the taxpayerderives substantial royalty income from such use.

In sum, the decisions of the state courts do notdemonstrate "a mature, well-recognized, andentrenched split of authority." Pet. 16. Theyrepresent instead (1) a growing consensus amongrecent decisions and (2) minor historical anomaliesfrom States that have joined or might later defer tothe recent and clear trend. C£ Portland 76Auto~Truck Plaza, Inc. v. Union 0il Co., 153 F.3d938, 943 (9th Cir. 1998) ("Because of the importanceof predictability to commercial relations, as well asdeference to our sister circuits, we shall not lightlycreate an intereireuit conflict affecting commercenationally."). For these reasons, the decisions citedby petitioners do not support plenary review of theissue presented at this time.

III. THE COURT SHOULD NOT GRANTREVIEW BASED ON MERE SPECULATIONABOUT BURDENS ON INTERSTATE ANDFOREIGN COMMERCE.

A. Speculative Claims About an "UndueBurden" on Interstate Commerce Do NotSupport Plenary Review of the IssuePresented.

Petitioner argues that the rule applied by theSJC will have "severe economic implications." Pet.33. It claims that a corporation will be unable "toorder its business affairs and determine in what

21

States it can be subject to state income and franchisetax." Pet. 34. For the reasons stated below, thesealleged burdens on interstate commerce do notjustify plenary re~iew in this case.

The SJC correctly rejected the sameexaggerated predictions of doom by corporate net-income taxpayers and amiei curiae in the relatedcase of Capital Ozte Bank. Contrasting the sales anduse taxes addressed in Quill, the SJC stated that "anincome-based excise.., typically is paid only once ayear (except when quarterly estimated taxes arerequired), to one taxing jurisdiction on the statelevel, and the payment of such an excise does notentail collection obligations vis-a-vis consumers."899 N.E. 2d at 85 n.17 (citations omitted). The SJCcontinued:

Determinations about whether the [banks] aresubject to the [tax] . . or how to apportionincome from business activity that is taxablewithin [Massachusetts] are the sorts ofdecisions that, more broadly, can confront alltaxpayers, local or out-of-state, whencalculating, reporting, and paying taxes ontheir income. While the making of thesedeterminations is certainly more complex forlarge corporate taxpayers, it is part of the costof doing business and is not, in our opinion,unduly burdensome on interstate commerce,particularly where such taxpayers, like the[petitioners] are earning substantial incomefrom their business activities in Massachusettsand where the common usage of computer

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technology and specialized software has easedthe administrative burdens of tax compliance.

Having failed to convince the SJC of an"undue burden" on commerce, petitioner and amieicuriae now flood the Court with a new round ofspeculation about the impact of the nexus ruleupheld in this case. But speculation does notestablish clear proof that this case is of such "gravityand importance" as to warrant review by this Court.See In Re Woods, 143 U.S. 202, 206 (1892).

As the party urging a new rule of physicalpresence for corporate income taxes, petitioner hasthe burden to show an impact requiring interventionby this Court. Petitioner has not met its burden. Itgrossly exaggerates when it claims that the ruleapplied by the SJC will have "severe economicimplications." Pet. 33. As petitioner concedes,taxpayers selling tangible goods, if they have nophysical presence in the taxing State, may beprotected from tax by P.L. 86-272, 15 U.S.C. § 381.Similarly, small and medium size businesses may beprotected by (1) statutory thresholds protecting deminimis contacts or (2) the Due Process Clause.

Nor is plenary review supported bypetitioner’s statement that "many administrative...decisions on the question have been issued by otherStates." Pet. 5 n.1. Petitioner does not cite newlitigation or practical problems arising from thesedevelopments, thus tending to prove that theapproach is workable and not unduly burdensome.

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If issues later arise, they should be allowed toproceed through the state courts, where recordscould be developed to allow for full consideration ofthe alleged burdens of compliance. It is premature,however, to conclude that recent state actions willproduce a conflict of authority requiring interventionby this Court.

Finally, petitioner’s claims about burdens oncommerce ignore the other restraints imposed by theCommerce Clause, viz., the requirements that anytax be fairly apportioned, non-discriminatory, andfairly related to a State’s services. These other testsunder Complete Auto address many of the spectersthat petitioners and amici curiae conjure in arguingfor a physical presence requirement for nexus. Thepetition and the briefs of the amici curiae ignore thefact that issues, regarding discrimination andmultiple taxation are separate and distinct fromnexus. These separate claims against state taxationdo not support review of the nexus questionpresented in this case.a

Petitioner argues that a "physical presence" rule ispreferable to the rule applied by the SJC because the physicalpresence test alone is a "bright line" rule. But decisions of statecourts demonstrate that the physical presence test has its ownambiguities. See, e.g., Dell Catalog Sales, 199 P.3d 863 (N.M.Ct. App. 2008), cert. denied, 129 S.Ct. 1616 (2009).

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B. The Alleged Impact on Foreign CommerceWas Not Raised Below and In Any EventDoes Not Support Review by this Court.

Petitioner also argues that the "economicnexus standard has adverse global implications."Pet. 36-38. Petitioner made no claim under theForeign Commerce Clause in the SJC. See Brie££orGeoffrey, Inc., Appe]]ant, 2008 WL 4359876(January 31, 2008). "In cases coming [to the Court]from state courts, there are reasons of peculiar forcewhich should lead [the Court] to refrain fromdeciding questions not presented or decided in thehighest court of the state .... " McGo]d~’ick v.Comp,~gnie Gene.r~]e, 309 U.S. 430, 434 (1940).Even if petitioner has preserved the issue, or merelycites the alleged impact on foreign commerce asevidence of the importance of the question presented,its argument does not support plenary review. Sucharguments by petitioners and smiei eu~rise have notbeen documented or examined in these proceedings.If a foreign corporation later challenges a tax onsuch grounds, it may create a full record and seekreview by this Court at that time. Meanwhile, asexplained below, the policy arguments made by thepetition should be addressed to Congress, not theCourt.

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THE COURT SHOULD DENY THEPETITION IN DEFERENCE TO THECONSTITUTIONAL ROLE OF CONGRESSIN WEIGHING BURDENS ONINTERSTATE COMMERCE.

Petitioner argues that "[a]bsent clear guidancefrom this Court," there will be adverse economiceffects on multi-state businesses. Pet. 34. To thecontrary, the Court should deny the petition becausethe issue presented is better decided by Congress,which this Court has said has power under theCommerce Clause to "evaluate the burdens thattaxes impose on interstate commerce." QuiI], 504U.S. at 36. Whatever ruling that this Court mightmake on the merits of the issue presented here,"Congress remains free to disagree with [the Court’s]conclusions." Id. As petitioner notes (Pet. 27 n.5),Congress has enacted limitations on state taxation.See, e.g., 15 U.S.C,. § 381; 15 U.S.C. § 391; 49 U.S.C.§ 11501. Regarding the issue presented here,Congress has for at least eight years considered billsdirectly addressing the issue, including a billpending in the current session of Congress.Business Activity Tax Simplification Act of 2009,H.R. 1083, 111th Cong. (2009).

Despite these legislative vehicles for action,petitioner states that "Congress has given noindication in the nearly two decades since Quill" thatit "intends to follow up .... " Pet. 5. But this pointignores the most important inference from the fact ofthe bills: they show that the issue presented is by itsnature one that Congress is "better qualified to

26

resolve." Qui]l, 504 U.S. at 318 and n.ll. Thus, inQui]] the Court cited unenacted bills in its discussionof Congress’s relative competence regarding thesame issues. The Court recognized that Congress is’%etter qualified" to conduct a full study of therelevant factors, including alleged burdens onbusiness and likely fiscal impacts on the States.These issues are ones involving legislative fact.They are better weighed by Congress in hearings,reports, and debates. See, e.g., Interstate TaxationAct: Hearings on H.R. 11798 and Companion BillsBefore Special Subcomm. On State Taxation ofInterstate Commerce of the House Comm. on theJudiciary, 89th Cong., 2d Sess. (1966). Where, ashere, taxpayers seek a broad exemption from tax,Congress is better qualified to judge the impact ofthe exemption on other commerce and other types ofstate taxation.

Petitioner cites business "uncertainty" that is"costly" and "inhibits strategic business planning"(Pet. 34), but these factors are by their naturelegislative facts that Congress is well suited toweigh. Judicial review of the same questions, incontrast, is necessarily limited by the four-corners ofa judicial record and the retrospective cast of alawsuit. Judicial conclusions about respectiveburdens will necessarily be both limited andspeculative. The Court has warned that thejudiciary "must be on guard against imprisoning thetaxing power of the states within formulas that arenot compelled by the Constitution but merelyrepresent judicial generalizations exceeding theconcrete circumstances which they profess to

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summarize." Wisconsin v. J.C. Penney Co., 311 U.S.435, 445 (1940). For these reasons, the Court shoulddefer to the legislative role expressly conferred onCongress by the Commerce Clause.

CONCLUSION

For the rem,~ons stated above, the petition for awrit of certiorari should be denied.

Respectfully submitted,

MARTHA COAKLEY

Attorney General

Thomas A. Barnico*Assistant Attorney General

One Ashburton PlaceBoston, MA 02108-1598(617) 963-2086

* Counsel o£Reeord

May 22, 2009

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